Strategic Management

1. Internal Analysis (value chain concept and core competence)

Value chain analysis - Michael Porter in 1985 introduced in his book The Competitive
Advantage the concept of the Value Chain. He suggested that activities within the organization
add value to the service and products that the organization produces, and all these activities
should be run at optimum level if the organization is to gain any real competitive advantage. If
they are run efficiently the value obtained should exceed the costs of running them i.e. customers
should return to the organization and transact freely and willingly. Michael Porter suggested that
the organization is split into primary activities and support activities.

Primary activities
Inbound logistics: Refers to goods being obtained from the organizations suppliers ready to be
used for producing the end product. (materials handling, warehousing, inventory control,
transportation)
Operations: The raw materials and goods obtained are manufactured into the final product.
Value is added to the product at this stage as it moves through the production line. (machine
operating, assembly, packaging, testing and maintenance)
Outbound logistics: Once the products have been manufactured they are ready to be distributed
to distribution centers, wholesalers, retailers or customers. (order processing, warehousing,
transportation and distribution)

Marketing and Sales: Marketing must make sure that the product is targeted towards the correct
customer group. The marketing mix is used to establish an effective strategy; any competitive
advantage is clearly communicated to the target group by the use of the promotional mix.
(advertising, promotion, selling, pricing, channel management)
Services: After the product/service has been sold what support services does the organization
have to offer. This may come in the form of after sales training, guarantees and warranties.
(installation, servicing, spare part management)
With the above activities, any or a combination of them, maybe essential for the firm to develop
the competitive advantage which Porter talks about in his book.

Support Activities
The support activities assist the primary activities in helping the organization achieve its
competitive advantage. They include:
Procurement: This department must source raw materials for the organization and obtain the
best price for doing so. For the price they must obtain the best possible quality (purchasing raw
materials, lease properties, supplier contract negotiations)
Technology development: The use of technology to obtain a competitive advantage within the
organization. This is very important in todays technological driven environment. Technology
can be used in production to reduce cost thus add value, or in research and development to
develop new products, or via the use of the internet so customers have access to online facilities.
(Research & development, IT, product and process development)
Human resource management: The organization will have to recruit, train and develop the
correct people for the organization if they are to succeed in their objectives. Staff will have to be
motivated and paid the market rate if they are to stay with the organization and add value to it
over their duration of employment. Within the service sector e.g. airlines it is the staff who may
offer the competitive advantage that is needed within the field. (recruitment, education,
promotion, reward systems)
Firm infrastructure: Every organization needs to ensure that their finances, legal structure and
management structure works efficiently and helps drive the organization forward. (general
management, planning, finance, legal, investor relations)
As you can see the value chain encompasses the whole organization and looks at how primary
and support activities can work together effectively and efficiently to help gain the organization a
superior competitive advantage.
pros:
Value Chain Analysis provides a generic framework to analyze both the behavior of costs as well
as the existing and potential sources of differentiation.

Porter emphasized the importance of (re)grouping functions into activities to produce, market,
deliver and support products, to think about relationships between activities and to link the value
chain to the understanding of an organizations competitive position.
The value chain made clear that an organization is multifaceted and that its underlying activities
need to be analyzed to understand its overall competitive position. An organizations strengths
and weaknesses can only be identified in relation to the profiles of its direct competitors.
Competitive advantage is derived from an integrated set of decisions on these key activities.
The Value Chain model was intended as a quantitative analysis. It can also be used as a quick
scan to describe the strengths and weaknesses of an organization in qualitative terms.
With the Value Chain Analysis, Porter tried to overcome the limitations of portfolio planning in
multidivisional organizations. The concept of Strategic Business Units stated that businesses
within a conglomerate should act independently while headquarters should be responsible only
for budgetary decisions to be based on a business unit's position in the overall portfolio. Porter
used his Value Chain Analysis to identify synergies or shared activities between Strategic
Business Units and to provide a tool to focus on the whole rather than on the parts.
cons:
The quantitative analysis is time consuming since it often requires recalibrating the accounting
system to allocate costs to individual activities. Porter provided qualitative guidance for a
quantitative exercise. His analysis began with identifying the relevant activities that lead to
competitive differences and are significant enough to influence the organizations overall cost
base.
The Value Chain Analysis should be accompanied with a customer segmentation analysis to mix
the internal and external view. A feature or product provides the firm with a differentiating
competitive advantage only if customers are willing to pay for it. Customer value chains need to
be analyzed to determine where value is created.
The Value Chain is used to analyze a firm's position in relation to its direct competitors with the
assumption that rivalry drives profitability. This excludes other assumptions such as customer
bonding in Alexander Hax's delta model.
The Value Chain Analysis was developed to analyze physical assets in product environments.
Other authors amended the model to accommodate intangible assets and service organizations.

Core Competence - Collective Learning in the Organization is a technique that enables better
strategic planning in business.

Core competencies are the collective learning in the organization. Unlike physical assets, which
do deteriorate over time, competencies are enhanced as they are applied and shared. First
companies must identify core competencies, which provide potential access to a wide variety of
markets, make a contribution to the customer benefits of the product, and are difficult for
competitors to imitate. Next companies must reorganize to learn from alliances and focus on
internal development.
Core competencies can be determined with the following three tests:

A core competence provides potential access to a wide variety of markets.

A core competence makes a significant contribution to the perceived customer benefits of
the end product.

A core competence is difficult for competitors to imitate because it is a complex

harmonization of individual technologies and production skills.
The core competence idea was useful to managers not only for focusing them on the
essentials, but also for identifying those things that were not at the core. Why,
management might ask, were these non-essential things being allowed to consume
valuable resources?
The drive to identify core competencies moved in line with the growing popularity of
outsourcing. When companies were suddenly able to outsource almost any process that
came under their corporate umbrella, they needed to know what lay in the hard core of
activities that they were uniquely well qualified to carry out, the activities that it made no
sense for them to hand over to a third party. In some cases the answer was very few.

2. Generic Strategies (differentiation and low cost) advantages and

disadvantages
Porters generic strategies framework constitutes a major contribution to the development of the
strategic management literature. Generic strategies were first presented in two books by
Professor Michael Porter of the Harvard Business School (Porter, 1980, 1985). Porter (1980,
1985) suggested that some of the most basic choices faced by companies are essentially the
scope of the markets that the company would serve and how the company would compete in the
selected markets. Competitive strategies focus on ways in which a company can achieve the
most advantageous position that it possibly can in its industry (Pearson, 1999). The profit of a
company is essentially the difference between its revenues and costs. Therefore high profitability
can be achieved through achieving the lowest costs or the highest prices vis--vis the
competition. Porter used the terms cost leadership and differentiation, wherein the latter is the
way in which companies can earn a price premium.
Main aspects of Porters Generic Strategies Analysis

Companies can achieve competitive advantages essentially by differentiating their products and
services from those of competitors and through low costs. Firms can target their products by a
broad target, thereby covering most of the marketplace, or they can focus on a narrow target in
the market (Lynch, 2003) (Figure 1). According to Porter, there are three generic strategies that a
company can undertake to attain competitive advantage: cost leadership, differentiation, and
focus.

Cost leadership - The companies that attempt to become the lowest-cost producers in an
industry can be referred to as those following a cost leadership strategy. The company with the
lowest costs would earn the highest profits in the event when the competing products are
essentially undifferentiated, and selling at a standard market price. Companies following this
strategy place emphasis on cost reduction in every activity in the value chain. It is important to
note that a company might be a cost leader but that does not necessarily imply that the
companys products would have a low price. In certain instances, the company can for instance
charge an average price while following the low cost leadership strategy and reinvest the extra
profits into the business (Lynch, 2003). Examples of companies following a cost leadership
strategy include RyanAir, and easyJet, in airlines, and ASDA and Tesco, in superstores.
Disadvantage - The risk of following the cost leadership strategy is that the companys focus on
reducing costs, even sometimes at the expense of other vital factors, may become so dominant
that the company loses vision of why it embarked on one such strategy in the first place.
Differentiation - When a company differentiates its products, it is often able to charge a
premium price for its products or services in the market. Some general examples of
differentiation include better service levels to customers, better product performance etc. in
comparison with the existing competitors. Porter (1980) has argued that for a company
employing a differentiation strategy, there would be extra costs that the company would have to
incur. Such extra costs may include high advertising spending to promote a differentiated brand

image for the product, which in fact can be considered as a cost and an investment. McDonalds ,
for example, is differentiated by its very brand name and brand images of Big Mac and Ronald
McDonald.
Disadvantage - Differentiation has many advantages for the firm which makes use of the
strategy. Some problematic areas include the difficulty on part of the firm to estimate if the extra
costs entailed in differentiation can actually be recovered from the customer through premium
pricing. Moreover, successful differentiation strategy of a firm may attract competitors to enter
the companys market segment and copy the differentiated product (Lynch, 2003).
Focus - Porter initially presented focus as one of the three generic strategies, but later identified
focus as a moderator of the two strategies. Companies employ this strategy by focusing on the
areas in a market where there is the least amount of competition (Pearson, 1999). Organisations
can make use of the focus strategy by focusing on a specific niche in the market and offering
specialised products for that niche. This is why the focus strategy is also sometimes referred to as
the niche strategy (Lynch, 2003). Therefore, competitive advantage can be achieved only in the
companys target segments by employing the focus strategy. The company can make use of the
cost leadership or differentiation approach with regard to the focus strategy. In that, a company
using the cost focus approach would aim for a cost advantage in its target segment only. If a
company is using the differentiation focus approach, it would aim for differentiation in its target
segment only, and not the overall market.
This strategy provides the company the possibility to charge a premium price for superior quality
(differentiation focus) or by offering a low price product to a small and specialised group of
buyers (cost focus). Ferrari and Rolls-Royce are classic examples of niche players in the
automobile industry. Both these companies have a niche of premium products available at a
premium price. Moreover, they have a small percentage of the worldwide market, which is a trait
characteristic of niche players. The downside of the focus strategy, however, is that the niche
characteristically is small and may not be significant or large enough to justify a companys
attention. The focus on costs can be difficult in industries where economies of scale play an
important role. There is the evident danger that the niche may disappear over time, as the
business environment and customer preferences change over time.
Stuck in the middle - According to Porter (1980), a companys failure to make a choice between
cost leadership and differentiation essentially implies that the company is stuck in the middle.
There is no competitive advantage for a company that is stuck in the middle and the result is
often poor financial performance (Porter, 1980). However, there is disagreement between
scholars on this aspect of the analysis. Kay (1993) and Miller (1992) have cited empirical
examples of successful companies like Toyota and Benetton, which have adopted more than one
generic strategy. Both these companies used the generic strategies of differentiation and low cost
simultaneously, which led to the success of the companies.
Limitations of Porter's Generic Strategies Analysis
During the 1980s, the generic strategies were regarded as fundamental to strategy and the ideas
suggested by Porter were used extensively. It became clear over time that in reality there were
some shades of grey in the distinction between differentiation and cost, compared to the black

and white that is projected in theory. It is very difficult for most companies to completely
ignore cost, no matter how different their product offering is. Similarly, most companies will
not admit that their product is essentially the same as that of others (Macmillan et al, 2000).
It is important for analysts to bear in mind that Porter's generic strategies should be considered
as a part of a broader strategic analysis. The generic strategies only provide a good starting
point for exploring the concepts of cost leadership and differentiation. Perhaps a major
limitation of the generic strategies is that they may not provide relevant strategic routes in the
case of fast growing markets (Lynch, 2003). It is important to conduct other analyses like
PESTEL analysis to analyze how the generic strategy being employed by a company should
change in accordance with external factors. Other useful analyses would include SWOT
analysis, analysis of the key success factors etc.

3.

Related and Unrelated Diversification

Related diversification comes about when the organization moves or diversifies into a new
product and new market which are considered as related business activities. For example a paper
producing company may diversify into book publishing known also as concentric diversification,
it is sometimes argued as to whether this is a true form of diversification. The spate of companies
using diversification as a form of expansion cannot be over emphasized due to the advantages
and the likelihood that similar customers in similar markets might be reached. Some of the
reasons for related diversification are discussed here.
The company spreads the risk by engaging into a related product and market using in most
instances the same experience. To ensure continuity of supply, a manufacturer may try to own its
own supply outlets; say a car manufacturer produces its own components. The aircraft
manufacturer, Boeing's Integrated Defense systems, for example is a subsidiary established to
integrate and provide instantaneous, accurate and protected information to decision makers and
soldiers in the field when they need it, anytime, anywhere.
Sometimes it is difficult to distinguish when a strategy is a generic differentiation or a related
diversification. The rationale for related diversification is strategic. This is to say that firms
diversify into businesses with strategic-fit thereby sharing opportunities that may exist in the
businesses' value chains. By strategic-fit is meant when the business identifies the opportunities
arising from the environment - shared technology, common labor skills, common distribution
channels, similar operating methods - and adapting resources so as to take advantage of them
which invariably leads into gaining a competitive advantage to achieve the desired goal.
Another reason for related diversification is that it helps the firm achieve economies of scope.
These economies of scope arise from ability to eliminate or reduce cost significantly by
operating two or more business under one corporate headquarters; or when cost-saving
opportunities can stem from interrelationships anywhere along business value chains. Synergy is
another reason for related diversification. This occurs when the combined effect of the two is
greater than the sum of the parts. This is a claim by Benetton in 1995 that there were synergies
resulting from its diversification.

Unrelated diversification is based on the dominant concept that any company that can be
acquired on good financial terms and offers good prospects for profitability is a good business to
diversify into. It is basically a financial approach. This is to say that the strategic position of the
business gives it the advantage to diversity into an unrelated business expecting financial gains
compared to strategic-fit as in related diversification. Firms usually pursuing unrelated
diversification as a strategy are referred to as conglomerates with no unifying strategic theme.
Until recently the literature on diversification has only been on environment-led perspective thus
portraying a narrow benefit beyond the current product and market base of the firm and outside
their value chains. The introduction of resource-led perspective broadens the degree of
relatedness and its attendant opportunities. Unrelated diversification can be approached by any of
the following methods.

Exploitation of the current core competences of the organization by extending existing

markets into new markets and new products. It could also come about by the creation of
completely new markets. This is usually seen as opportunities coming as a result of the
core business, for example Kwik Fit offering insurance services.
The other approach is developing new competences for new market opportunities. Some
of the advantages which come with unrelated diversification may include spreading of
business risks over a variety of industries; providing opportunities for quick financial
gain if bargain-priced firms with big profit potential are spotted thereby enhancing
shareholder's wealth. Again, profit or earnings are greatly stabilized as one industry's hard
times is offset by good times in others.

Nevertheless, certain drawbacks are prevalent in going that path. Achieving these
aforementioned advantages, places big demand on corporate management. They had to be
extremely small to spot problems. More businesses in a conglomerate, the harder it is for
management to judge the strategic plans of business manager in any subsidiary or business unit.
It is finally argued that consolidated performance of unrelated businesses tends to be no better
than sum of individual businesses or their own or may be worse; unless managers are very
talented and focused, unrelated diversification cannot be used to increase shareholder wealth
compared to related diversification. It must be noted here that development into new related or
unrelated businesses can take any of three forms: internal development - where strategies are
developed by building up the organization's developed resources and competences by taking over
another one; and joint developments or strategic alliances where two or more organisations share
resources and activities to pursue a strategy.
It is worth commenting that diversification s one of the most frequently researched areas of
business with some research studies specifically attempting to investigate the relationship
between diversification as a business strategy and the organizations financial performance. For
quite sometimes researchers suggested that unrelated diversification were deemed unprofitable in
comparison with related diversification. Such as car makers' diversification into car rental. These
early research finding were later questioned as to the linkage of diversification to an
organizations financial performance, However, the main problem has been the failure of
organizations to determine the nature or degree of relatedness.
Nagyar (1992) identified two areas of potential relatedness:

opportunities for resource leveraging: He argued that two businesses are related if all
types of tangible and intangible resources can be achieved by physically transferring
resources from one business unit to another; by copying resources from each other and
using resources simultaneously e.g. using same brand name.

Opportunities for strategy alignment: He argued that two businesses are related if the
alignment of their market strategies creates benefit. In other words, coordinated behavior
between businesses gives them the needed competitive advantage. For example
horizontally related businesses team up to multiply their effective market power on
competitors as well as vertically related businesses units may be preferable to
independent buyers and suppliers.

Though, diversification may be difficult to achieve fully in practice, diversification may simply
be necessary to achieve continuing growth when the current markets become saturated.
Key issues to be considered when deciding upon diversification strategy:

Synergy (usually is best with related diversification)

Emerging markets are much more open to diversification. They are faster to adopt and
adapt, learn from others. While Europeans and Americans are slow to adapt.

3 essential tests before diversification will create shareholder value:

Attractiveness test the industries chosen for diversification must be

structurally attractive or capable of being made attractive

Cost-of-entry test the cost of entry must not capitalize all the future
profits

The better-off test either the new unit must gain competitive advantage
from its link with the corporation or vice versa

Four types of management

Portfolio management (most common) through acquisition

Restructuring more effective than portfolio management seeks out

undeveloped, sick, or threatened organizations. Can be successful but often hard
to dispose of these businesses

Transferring skills can be successful but difficult synergy is very elusive &
fails to materialize. Need to utilize the value chain can transfer skills or
expertise among similar value chains or share activities (same sales force) the
businesses need to be similar

Sharing activities e.g. common distribution system & sales force can be very
useful but are pitfalls

4. National Competitive Advantage (Porters theory, diamond)

In the mid-1980s, Professor Michael Porter of Harvard Business School developed a framework
to assess the competitiveness of regions, states and nations.
In the early 1980s, U.S. industry saw its economic competitiveness eroded by Japanese and
European competitors. Porter concluded that classical international trade theories, which mainly
focused on slowly changing, inherited variables such as natural resources, climate, size of
working population, etc., could only partially explain why nations gain competitive advantage in
a given industry. This observation initiated a four year study of ten major trading nations and 100
industries that covered 50% of total world exports in 1985.
Successful international industries tend to be located within particular cities and regions.
Geographic concentration is vital for firms to efficiently draw on each others resources and
capabilities and to benefit from a shared culture and learning experience, supply capabilities and
local infrastructure. Industry clusters are geographical concentrations of interconnected
businesses, suppliers, and associated institutions in a particular field. Clusters lead to
productivity increases, higher innovation rates and faster new business developments. Porter
argued that productivity is the main factor for international competitiveness and that the standard
of living of a countrys population can be improved as a direct result of increases in that factor.
Clusters may take different forms between firms producing different products across value-added
chains or between firms producing similar products at different stages of the same chain.
Examples are banking in London and New York, chemical transport in Rotterdam, Houston and
Singapore, film in Mumbai and Hollywood and Internet/Software in Silicon Valley and
Bangalore.
Porters Diamond of competitive advantage model of nations consists of four main attributes that
shape the national environment in which local, connected firms compete:

1. FACTOR CONDITIONS
The nations relative position in vital industrial production factors such as skilled labor or
infrastructure, are important determinants of national competiveness. Both the level of individual
factors and the overall composition of the resource mix must be considered. Factors can be
country specific or industry specific. For example, Japans large pool of engineers -- reflected by
a much higher number of engineering graduates per capita than almost any other nation -- has
been vital to Japans success in many manufacturing industries.
2. DEMAND CONDITIONS
The nature of home demand for an industrys products and services requires considering both the
quantity and quality of the demand. For example, Japans sophisticated and knowledgeable
buyers of cameras helped stimulate the Japanese camera industry to improve product quality and
to launch new, innovative models.
3. RELATED AND SUPPORTING INDUSTRIES
The presence or absence in the nation of internationally competitive supplier and related
industries is a key factor. Until the mid-1980s for example, the technological leadership in the
U.S. semiconductor industry provided the basis for U.S. success in personal computers and
several other technically advanced electronic products. Adoption of the automobile took off in
the USA after the construction of a national system of highways and gas stations.
4. FIRM STRATEGY, STRUCTURE, AND RIVALRY
The national conditions that determine how companies are created, organized and managed, as
well as the nature and extent of domestic rivalry. For example, the predominance of engineers on
the top-management teams of German and Japanese firms results in emphasizing the
improvement of the manufacturing processes and product design. Furthermore, domestic rivalry
creates pressure to launch new products, to improve quality, to reduce costs and to invest in new,
more advanced technologies.
Porter stated two additional variables that indirectly influence the diamond:

5. CHANCE EVENTS
Disruptive developments outside the control of firms and governments that allow in new players
who exploit opportunities arising from a reshaped industry structure. For example, radical
innovations, unexpected oil price rises, revolutions, wars, etc.
6. GOVERNMENT
Government choice of policies can influence each of the four determinants. Successful
government policies work in those industries where underlying determinants of national
advantage are present and reinforced by government actions. Government can raise the odds of
gaining competitive advantage but lacks the power to create advantages on its own.
These six attributes promote or impede the creation of competitive advantages of firms, clusters,
and nations. All conditions need to be present and favorable for an industry/company within a
country to attain global supremacy.
Managers can use the diamond model during their internationalization efforts to determine if the
home market can support and sustain a successful internationalization effort or to asses in which
country to invest next. The model helps entrepreneurs decide where to start their next venture.
Government officials can use the model for guidance on how to best build a supporting policy
framework for a given industry